Monday, September 15, 2008

Lehman - At Least The Socialists Are Happy

The Lehman crisis has dominated news today, in every quarter. Amid all the doom and gloom there are some people who are as happy as a Goldman banker at bonus time. The socialists.

I have read so much on the web about capitalism getting what it deserves (finally) and comments on blogs about 'greedy bankers' causing the downfall of the financial system.

It's all very entertaining and I can see why certain sectors of the community have no sympathy. For years now we have seen bankers and their CEO's pay themselves huge bonuses, beyond what has ever gone before and some people don't like it. When one of our number gets it in the neck you can see why the socialists would throw this in our faces.

The irony is, however, that regardless of the net affect on the global markets over the next few days, and the knock-on affects of the Lehman failure, the very fact that it is being allowed to fail is a shining example of the free market in all its glory.

Although I agreed with the Fannie and Freddie bail-outs I was becoming increasing uncomfortable that failed banks were being bailed out in the manner that they have been. A correction is the capital markets' natural way of cleansing itself and if there is no downside to moral hazard then we would be living in a socialist state, would we not?

Yes the integrity of the financial system should be kept in tact and yes, we should not let our banking system fail, so there has to be some form of support. But to let bankers pay out millions and millions of dollars to themselves on (what turned out to be) shaky financial constructs and therefore 'false' profits was, to put it mildly, irresponsible.

To then bail-out these same bankers and allow them to continue with their million dollar salaries without come-back is not what the capitalist system is all about.

Risk has an inherent reward, the more risk you take the higher the potential reward, that’s how it goes. To turn this on its head and protect the downside of dodgy financial instruments by bailing out big banks who took those risks and created those products is to destroy the system and create an 'untouchable' elite group of millionaires who will never pay a price, no matter what risks they take.

How many small wealth managers, small banks and small brokerages are suffering because of this crisis? Will they ever see any assistance if they look as though they are failing in this market? Not a chance.

I know of several owners of small companies in this industry who are now putting back their salaries and bonuses from the good times to save the businesses they have built. This is the way it works.

I have no idea how much the big wigs at Lehman earn, but I bet they are not poor. With their accumulated wealth one would assume that they could make a significant dent in the monies required to keep the company afloat. Maybe then Barclays et al would have had more confidence that the bank would survive.

The capitalist economy flourished in the early days because management had most of their wealth wrapped up in their companies, these days, this is mostly not the case. One thing I do know, however, is that a number of junior bankers at both Bear and Lehman had the vast majority of their wealth tied up in the magic beans of stock in the companies they believed in and today they must be very unhappy with their former bosses. Shouting 'Power to the People' at them today may not be good for your health.

No comments: